Unique Financial Preferences of the Millennial Generation
Our experiences shape our beliefs and actions. This simple fact holds true for Millennials and their financial decisions. Millennials, people of the ages 18 to 34, began entering the labor force during the worst financial crisis since the Great Depression. It should come as no surprise that many young workers are hesitant to take on unnecessary risks in financial markets.
Aside from risk-aversion, Millennials have unique economic preferences regarding values. A desire for independence and purposeful work drives many young people to save and invest in short-term work goals. A recent study revealed that 29% of Millennials aim to use their investment returns to support work that they are passionate about.
Do these preferences about risk and values affect Millennial financial decisions? More than you might expect. Let’s check out some of the financial behaviors of Millennials.
They value the present more than the future
Millennials tend to make financial decisions that lead to short-term returns instead of long-term financial stability. Data about investing styles mirror this tendency. According to a report published by BMO Wealth Management, just 32% of Millennial investors use a buy and hold strategy after receiving extra cash.
Buying and holding assets over a long period is the surest way to maximize returns. The strategy reduces transaction fees, and it provides a long growth period. Finance legends like Warren Buffett have used this conventional investment wisdom. Interestingly, a majority of investors in every generation do not use these buy and hold strategy.
A minority of Baby Boomers (43%) use the buy and hold strategy. In every generation, people who do not buy and hold use a “save first, decide later” strategy. This suggests that investors in every generation are concerned about what the future may hold. Millennials seem to be especially cautious.
They do not like risks
Most people of all generations prefer safe returns to risky gambles. Millennials take this basic human preference to a new level with their finances. According to a recent study, approximately 75% of Millennials track their expenses carefully. This preference is unique to Millennials; only 64% of Millennials stated that they monitor their expenses carefully. Why are Millennials so careful to avoid financial risks?
As we mentioned earlier, Millennials first began searching for jobs during the Great Recession. Many young investors seem to be scarred by a time when the S&P 500 lost about half of its value. Memories of this time make Millennials hesitant to invest in stocks and risky financial instruments.
Interestingly, the fintech sector has responded to the risk preferences of Millennials. Microsavings and low-fee investment platforms like Acorns and Robinhood allow young savers to invest assets at their preferred levels of risk.
They prefer diverse financial portfolios
Millennials are also likely to have diverse financial portfolios to hedge risks. Their portfolios often include bonds, real estate, cryptocurrency, and precious metals. 11% of Millennials invest in gold to counter downswings in the stock market.
LendEDU conducted a survey to determine how Americans would invest a gift of $10,000. Despite having high levels of student debt, just 22% of Millennials responded that they would use the gift to pay off debt burdens. Interestingly, paying off debt is one of the best things Millennials can do to build their credit scores and afford homeownership. As interest rates rise, we may see Millennials working to raise their credit scores to buy, instead of rent, homes.
A substantial minority of Millennials stated that they would use the $10,000 to diversify their financial portfolios. 9.2% of Millennials responded that they would purchase cryptocurrency. 15.1% would buy real estate.
At times, Millennials can seem unconventional. However, their preference for diverse financial portfolios and low risk goes to show that they may be ultra-frugal investors.
They purchase homes differently
While just 37% of Millennials are homeowners, people under the age of 38 are demonstrating some home-purchasing preferences that are not common in older generations.
Unlike Baby Boomers and Gen-Xers, many Millennials are willing to begin the home-buying process alone. This trend might have something to do with the fact that fewer Millennials are getting married.
Millennials also have very specific preferences for the properties. For example, many Millennials have narrow preferences about the location, nearby schools, and economic status of the community when they consider a property. Meanwhile, Baby Boomers are willing to consider a more diverse range of options.
This difference in preferences is not surprising. After all, Millennials are thinking about what is best for their future families. Many Baby Boomers no longer have children to worry about, so their preferences are more flexible.
They aren’t thinking about retiring (yet)
BMO Wealth Management found that just 47% of investors between the ages of 18 and 34 responded that they are saving for retirement. This is not surprising when you look at 401(k) investment data. Two-thirds of Millennials have not contributed to a 401(k) retirement savings account.
Significant percentages of Millennials responded that they use investments to save for major upcoming expenses. 21% of Millennials are saving to pay for a holiday or major expense.
The reasons for this trend is unclear. Millennials are less likely to make many luxury expenses on sports cars and large homes, so perhaps they feel that they do not need large retirement budgets. It is also possible that Millennials feel they should not need to wait until their retirement years to enjoy life.
Millennials tend to be cautious investors who prefer immediate returns over long-run growth. These preferences may change as Millennials become older and acquire more wealth. Regardless of what happens, it will be interesting to see how the Great Recession continues to shape Millennial financial decisions.